The number of new reserved alternative investment funds registered in Luxembourg during a single month in June showed its first rebound since January. Issuance levels though are well below their historic averages. Economic and geopolitical issues get the blame, along with difficulties in raising institutional investment money. Still, faith in the vehicle remains strong, with private equity specialists expecting a further recovery in Raif registrations.
According to data downloaded from the Luxembourg Business Registers for analysis, 27 new Raifs were added in June, after 23 in May and 26 in April. During the first six months of this year, 179 new Raif funds were registered, compared to 232 during the same period last year, a 23% decrease.
Source: Investment Officer based on Luxembourg Business Register data.
“The latest data for Raif registrations in June comes as no surprise to those in the market where we are seeing the wider macroeconomic conditions, including geopolitical volatility, sticky inflation and continued interest rate rises in many economies, impact the number of new structures launched,” said Dominik Becker, regional head central & northern Europe for business development at Bermuda-headquartered Apex Group, which includes FundRock, Sanne, and - once regulatory approvals have been issued - MJ Hudson.
Earlier in the year, one senior Raif specialist dismissed such rationales as “easy comfort blankets”, despite valuation levels having peaked in 2022 and the fundamental change in market conditions.
Strong positive view
Despite the downturn in the first half of the year, Raif specialists maintain a strongly positive view of the vehicle and its prospects. “The Raif market is one of the most successful stories of new launches in recent years and we would expect any slowdown in registrations to be temporary,” said Micaela Forelli, CEO of M&G Europe Asset Management Operations.
The projected recovery of the Raif market is also seen getting a boost from last week’s adoption in Luxembourg’s parliament of a major upgrade for its various laws for investment funds. “The simplification of the constitution formalities for Raif will help us better serve our clients which are focused on a faster time to market,” said Dennis Harty, CEO at Waystone Luxembourg, a management company that is a major issuer of Raifs on behalf of third parties.
Some fund managers have kept up setting up new Raifs. “During the final days of 2022 and into the first half of 2023, Pemberton has registered several new Raif vehicles, reflecting continuing investor demand for alternative credit assets,” said Douglass Welch, portfolio management conducting officer of London-headquartered Pemberton Asset Management. The firm sees itself as a leading European private asset alternative credit manager. Despite the decline in Raif registrations, Welch explained that “in our opinion, the demand for alternative products remains strong.”
Pemberton has successfully launched Raif compartments, explained Welch, to accommodate LP commitments into its new NAV financing strategy and its risk sharing fund Mid-Market Debt Fund IV. “Raifs are an efficient structure to target specific investor types or investment specifications running parallel to our core product offering.”
Raif registrations compared
In June, Vistra Fund Management issued three new Raifs. Paris-headquartered Rothschild & Co Investment Managers registered two last month.
Still some strength
Apex’s Becker also sees some strength in Raif investments. “It is not all doom and gloom - there are some bright spots of activity such as infrastructure and renewable energy where we are still seeing a lot of interest and traction.”
Apex Group expects to see further appetite for special situation funds and secondary funds positioned to seize investment opportunities arising in the second half of 2023, according to Becker.
“We look forward to the second half of 2023 and beyond when we expect to see a partial recovery in the number of new launches as well as continued innovation in the market, with new structures and strategies being launched across the Luxembourg fund industry.”
Alternative investment fund managers have now registered a total of 2,279 Raifs in Luxembourg. This figure underlines Luxembourg’s role as a European hub for alternative investments, which includes Raifs and alternative funds of other types. CSSF data shows that the Grand Duchy is home to over 14,000 alternative funds, most created as sub-funds of LBR-registered Raifs.
In 2022, Luxembourg Business Registers recorded 453 new Raifs, a peak achieved thanks to a monthly average of nearly 40 new Raif registrations.
Less active firms dominant
A close-up look at Raif activity in June suggests that many of the less active challengers were still launching funds when some of the firms that topped the list of issuers last year were relatively quiet.
Apex’s Becker explained that his industry has had difficulty relying on institutional investors for cash flow.
“In the first half of 2023, managers have found it more challenging to attract institutional money, both because institutional investors have lower distributions from their existing investments and therefore less cash to reinvest, and also because the so-called denominator effect caps their ability to allocate additional capital to non-traditional strategies such as private markets.”
Institutional investors
M&G’s Forelli still sees institutional money as vital to the success of Raifs. “Institutional investors’ long-term interest in allocating to private assets will remain strong and Raifs are very efficient and flexible vehicles, offering clients innovation and diversification for their portfolios.”
In recent years, Luxembourg Raifs have become highly popular as alternative investment vehicles that target professional investors such as pension funds and insurance companies. A Raif can be created relatively swiftly and does not involve direct interaction with financial supervisors. Its management companies are nevertheless subject to supervision by Luxembourg’s CSSF.
However, the tightening of new institutional investor money is driving Apex Group and others in the private assets industry to look downmarket for new money.
Retail investors
“One consequence of this trend we are seeing play out is that managers are - and will continue - diversifying their investor base, opening up illiquid asset classes to new types of investors,” said Becker.
He said he sees opportunities in the retail investor space, in sync with the European Commission’s efforts to drive this forward. “We are increasingly called on by our private markets clients to draw on our extensive knowledge of the regulatory environment governing retail structures as well as the operational considerations and constraints for large-scale distribution platforms.”
Apex, along with others active in various ways in the private equity space, sees opportunities for Luxembourg in this process. “Our single-source model includes our Luxembourg-headquartered digital banking offering, which enables our clients to alleviate some of the challenges linked to a traditionally slower investor onboarding process,” said Becker.
Related articles on Investment Officer Luxembourg:
- Valuation adjustments lead to a lacklustre Raif market
- Raif registrations down 20% for year to date vs 2022
- Alternative investments now take 1/3 of Luxembourg pie